House flipping looks simple on television: buy low, renovate, sell high. The math is straightforward until you account for holding costs, financing costs, selling costs, and the contingency buffer that separates profitable flippers from people who lose money on their first deal.
This post walks through the complete deal analysis for a house flip: the 70% Rule, the MAO formula, a full cost breakdown on a real example, and the five costs most new flippers forget.
The 70% Rule is the industry-standard quick screen for fix-and-flip deals. It determines the maximum you should pay for a property before your margins become dangerously thin.
MAO = ARV × 70% − Rehab Costs
ARV = After-Repair Value (what the property sells for after renovation). Rehab Costs = total renovation budget including materials, labor, permits, and contingency. The 30% margin covers holding costs, transaction costs, and profit.
The 70% factor is not arbitrary. On a typical flip, selling costs consume 8–10% of ARV (agent commissions + closing costs), holding costs consume 5–8% (depending on timeline and financing), and the remaining 12–17% is your profit. Tighten the percentage and your margin for error disappears.
Warning: New flippers should never go above 70%. The margin exists to absorb mistakes you have not made yet. Experienced flippers who use 75% have a track record of accurate rehab estimates and fast turnarounds. First-timers who use 75% are the ones who lose money.
You find a distressed 3-bedroom, 2-bath property in a neighborhood where recently renovated comps sell for $300,000. The property needs a full kitchen and bathroom renovation, new flooring, paint, and roof repair. You estimate $55,000 in rehab costs.
| Item | Calculation | Amount |
|---|---|---|
| After-Repair Value (ARV) | Based on 4 comps | $300,000 |
| 70% of ARV | $300,000 × 0.70 | $210,000 |
| Estimated rehab | ($55,000) | |
| Maximum Allowable Offer | $155,000 |
Your maximum purchase price is $155,000. Any higher and the deal starts to erode.
Assume you purchase at $155,000 with a hard money loan at 12% interest, 2 points origination, 90% LTV. The rehab takes 4 months and the property lists and sells in 2 months (6 months total hold).
| Cost Category | Detail | Amount |
|---|---|---|
| Acquisition | ||
| Purchase price | $155,000 | |
| Closing costs (buy side) | ~2% of purchase | $3,100 |
| Hard money origination | 2 points on $139,500 loan | $2,790 |
| Rehab | ||
| Renovation budget | $55,000 | |
| Contingency (15%) | $55,000 × 15% | $8,250 |
| Holding Costs (6 months) | ||
| Hard money interest | $139,500 × 12% ÷ 12 × 6 | $8,370 |
| Property taxes | ~$4,800/yr ÷ 2 | $2,400 |
| Insurance | $150/mo × 6 | $900 |
| Utilities | $200/mo × 6 | $1,200 |
| Selling Costs | ||
| Agent commission | 5% of $300,000 | $15,000 |
| Closing costs (sell side) | ~1.5% of $300,000 | $4,500 |
| Total All-In Cost | $256,510 |
| Item | Amount |
|---|---|
| Sale price (ARV) | $300,000 |
| Total all-in cost | ($256,510) |
| Net Profit | $43,490 |
| Profit as % of ARV | 14.5% |
| Cash invested (down payment + rehab + costs) | ~$87,000 |
| Cash-on-cash return (annualized) | ~100% |
At $155,000 purchase price, the deal pencils at $43,490 profit (14.5% of ARV). The 70% Rule delivered exactly what it promises: enough margin to cover all costs and produce a double-digit return.
What if rehab goes over budget? The 15% contingency absorbs $8,250 in overruns. If costs exceed that — say the inspector finds foundation work needed — the deal still profits because the 70% Rule built in structural margin. At 75%, that same overrun would eat all of the profit.
Every month you own the property costs money: interest, taxes, insurance, utilities, lawn care. A 6-month hold at $3,500/month adds $21,000 to your costs. New flippers routinely underestimate rehab timelines by 2–3 months, which adds $7,000–$10,500 in unplanned holding costs.
Agent commissions (5–6% of sale price) plus seller closing costs (1–2%) consume 6–8% of ARV. On a $300,000 sale, that is $18,000–$24,000. This is the cost of actually converting your renovated property back into cash.
Hard money loans charge 1–3 origination points upfront plus 10–14% annual interest. On a $140,000 loan at 2 points and 12% interest for 6 months, financing costs total $11,160. This is money you pay regardless of whether the deal profits.
Permit costs vary by municipality but commonly run $2,000–$5,000 for a full kitchen and bathroom remodel. Skipping permits saves money upfront but creates liability at sale — an appraiser or inspector who discovers unpermitted work can kill the deal or reduce the appraised value.
Build 10–20% on top of every rehab estimate. Behind every wall is a potential surprise: termite damage, outdated electrical that does not meet code, plumbing that needs full replacement. Flippers who bid tight on rehab and carry no contingency are one inspection report away from a negative return.
Overestimating ARV is the number one reason flips lose money. The property is not worth what you want it to be worth — it is worth what comparable properties actually sold for.
The Fix & Flip Profit Calculator auto-builds the MAO, models holding costs by month, applies contingency, and shows your net profit under best-case, expected, and worst-case scenarios. Blue cells, instant verdicts, no subscription.
Get the Fix & Flip Calculator — $29How do you calculate the maximum allowable offer (MAO) for a house flip?
The standard formula is the 70% Rule: MAO = ARV × 70% − estimated rehab costs. If a property has an after-repair value of $300,000 and needs $55,000 in repairs, the MAO is $300,000 × 0.70 − $55,000 = $155,000. The 70% factor builds in margin for holding costs, transaction costs, and profit.
What are holding costs in a house flip?
Holding costs are the monthly expenses you pay while you own the property: mortgage or hard money interest, property taxes, insurance, utilities, HOA fees, and lawn maintenance. On a $200,000 purchase with a hard money loan at 12% interest-only, holding costs run approximately $3,000–$4,000 per month. A 6-month flip at $3,500/month adds $21,000 in holding costs that many new flippers forget to include.
What is a good profit margin on a house flip?
Experienced flippers target a minimum net profit of 10–15% of the ARV after all costs. On a $300,000 ARV property, that means $30,000–$45,000 net profit. Below 10%, the risk-reward ratio is poor because unexpected costs can wipe out the margin.
How do you estimate ARV (after-repair value)?
ARV is based on comparable sales of recently renovated properties in the same neighborhood, with similar square footage, bedroom/bathroom count, lot size, and condition. Pull 3–5 comps from the MLS that sold within the last 6 months and within a 1-mile radius. Use the median of your adjusted comps, not the highest. Overestimating ARV is the number one reason flips lose money.
What costs do most new house flippers forget?
The five most commonly forgotten costs are: (1) Holding costs during the rehab and listing period. (2) Selling costs including agent commissions at 5–6% plus closing costs. (3) Financing costs including origination fees and interest. (4) Permit fees and inspection costs. (5) A contingency buffer of 10–20% on top of the rehab estimate for unexpected issues.